Funds Trailing Stock Market by Most Since 1998, JPMorgan Says

Stock mutual funds are having their worst year since 1998 in matching their benchmarks, as higher correlation among shares makes it harder to pick stocks in a “whipsawing” market, JPMorgan Chase & Co. said

Among 2,920 funds tracked by the brokerage, 27 percent underperformed their benchmarks by more than 5 percentage points this year, the most since the 35 percent recorded in 1998. Only 7 percent of the funds beat the market by the same margin, the lowest level in 15 years, JPMorgan data showed.

“2010 has been a ‘whipsaw’ moving in a wide range and, as a result, active managers are badly trailing their indices,” JPMorgan Chief U.S. Equity Strategist Thomas J. Lee wrote in the report last week. “Trending markets tend to be better for active managers.”

Earnings grew at the fastest rate since 1988 this year even as the economy showed signs of faltering. Making it harder to pick investments, stocks moved in lockstep more than in at least two years. The Standard & Poor’s 500 Index rallied as much as 9.2 percent from its Dec. 31 close and dropped as much as 8.3 percent this year. The average correlation of S&P 500 stocks climbed to 81.09 on Aug. 24, the highest level since Bloomberg began tracking the CBOE S&P 500 Implied Correlation Index in November 2008.

The trailing funds are likely to increase holdings in companies that move the most relative to the benchmark, known as high-beta stocks, to boost performance, Lee said. Investors therefore should buy companies tied to economic growth such as industrials, he said. Included on his list of high-beta cyclical stocks are Whirlpool Corp., Deere & Co. and Macy’s Inc.